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Assignment:
A few years ago, a new US web-based motor club appeared with a peculiar business model. In exchange for a membership fee of less than $20 a month, the company promised to reimburse customers for up to $700 a year in moving violations (speeding tickets); the average cost of such a ticket is $200, with over 40 million issued annually -for reference, there are 243 million licensed drivers in the US. On its webpage, the club listed as its key selling points that members would no longer have to: pay tickets; take a day off or hire a lawyer to fight them; face late fees; or worry about roadside speed traps when driving. After receiving a ticket, a member would enter its details on the website and the company would pay the ticket and send a confirmation by text or email. Within months, the service had shut down. Set aside any potential legal or ethical problems and answer the following:
a) Identify the information asymmetry or asymmetries in this story. Describe the asymmetric information problem(s) and label the type of asymmetric information problem (i.e., principal-agent, moral hazard, adverse selection) correctly in each case.
b) Explain how the asymmetric information problems you identified in (a) posed a challenge to the viability of this service and almost certainly brought about its demise.
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